Headlines

* US Core CPI picks up, keeping another Fed hike in play this year

* Traders flip to bet on ECB hike as inflation upends rate view

* Stocks waver as traders parse Fed’s next move after CPI data

* Gold lower for a second day as it moves further below 200-day SMA

FX: USD finished higher for the day after the eagerly awaited, modestly stronger CPI data. Lingering inflation fears leave a final Fed rate hike on the table. This will probably come in their official forecasts. The chances of a November rate rise sit around 40%. Near-term resistance sits just above at 105.05/15 on the DXY.

EUR settled lower with a narrow range “inside” day. Eurozone industrial production fell 1.1% versus expectations of a 0.9% decline. But losses were contained as weak industrial sector data is not a surprise. EUR/USD remains in a long-term descending channel from the July high. See more below regarding today’s ECB meeting.

GBP slipped to a three-month low after weaker than expected GDP data. This showed the UK economy shrunk at its fastest pace in seven months. Growth fell 0.5% in July and rose 0.2% on the rolling quarterly comparison – both softer than forecast. Pricing for next week’s BoE meeting remained unchanged at around 80% chance of a hike (20bps). Support in cable is at 1.2472 and the 200-day SMA below at 1.2432.

USD/JPY moved higher firmly above 142.Core machinery orders are due today. The yen continued to give back Monday’s gains which was the biggest one-day climb in two months. Markets are still on watch for any signs of intervention after the major pierced 145. This level led to the first yen-buying intervention since 1998 last September and October.

AUD slid to a low of 0.6380 before settling above 0.64. Markets await the employment data, looking for a rebound (+25.3k expected) after July’s surprise contraction (-14.6k). The RBA is more focused on inflation and given the upcoming changes, including the impending handover of leadership to Deputy Governor Bullock this month who will steer the bank through next year’s scheduled reforms.

Stocks: US equities flipped-flopped and closed marginally in the green. The benchmark S&P 500 finished 0.12% higher at 4467. The tech-laden Nasdaq firmed 0.38% to settle at 15,348. The Dow underperformed, posting a back-to-back drop. It closed 0.2% at 34,575.

Asian futures are muted again and mixed.

Gold traded further below the 200-day SMA at $1920. Today’s US CPI saw one more Fed rate hike remain a possibility. Major support is at $1894.

Day Ahead – ECB meeting – hawkish pause or dovish hike?

It’s a tough decision to hike or keep rates unchanged for the ECB when it announces its rate decision later today. Money markets currently place a 2-in-3 chance of a 25bp rate hike. This has increased from 40% last week after an ECB sources story stated that the inflation forecast for next year would be raised above 3%. That would be the bank’s tenth consecutive rate rise and take the deposit rate to 4% with cumulative tightening of 450bps since last July.

The growth picture is deteriorating in the zone with recent PMI survey data pointing to a grim outlook, especially in Germany. But core inflation is still high and running at more than double the ECB’s target. Updated ECB staff projections are likely to show above target inflation over the policy horizon, thereby supporting a rate rise. The tone of the statement may also emphasise that rates will be held in restrictive territory for as long as necessary.

But headwinds on the horizon, coupled with higher oil prices and a weakening China may warrant a more cautious bias by Lagarde in the press conference. That could see the euro sink further against the dollar after eight straight weeks of losses. Waning growth momentum and the lagged effect of previous hikes could then set up a pause for the October meeting.

Chart of the Day – EUR/USD remains in the bear channel

It’s not been a summer of love for the euro with the major falling around 5%. That’s more than the corrections seen in January and May earlier in the year. The unrelenting run of strong US data has coincided with cratering eurozone business surveys indicating recession. Higher energy prices also do not help the region which is a net importer of oil.

EUR/USD has been stuck in a descending channel since topping out in mid-July at 1.1275. That denotes a series of lower highs and lower lows. Last week’s bottom at 1.0685 is key initial support ahead of the longer-term May low at 1.0635. Prices need to get back up to 1.08 to stop the bearish momentum.